Some landlords make rental property ownership look like an effortlessly profitable venture. And while it’s true that owning a nice rental property in a popular area can generate a healthy amount of passive income each month, this doesn’t mean that you won’t have to put in any work. Unfortunately, many first-time property owners go into this investment believing that rental properties will magically become profitable on their own. Fledgling investors looking to avoid this – and other consequential blunders – should be mindful of the following mistakes.
Failing to Factor in Management Costs
Rental properties are arguably the ultimate ongoing investments. In addition to property taxes, you’ll be responsible for both maintenance and insurance costs. Keep in mind that since homeowners insurance cannot be applied to rental properties, you’ll need to seek out a landlord insurance policy that’s well-suited to your needs. (Similarly, your tenants should be encouraged to purchase renters policies.)
Unsurprisingly, the larger the property, the more it will cost to maintain. For example, if you’re investing in an apartment building or condo complex, you’ll more than likely need to hire full-time maintenance personnel. Furthermore, you’ll need to maintain funds for a wide variety of repairs and renovations. So, before committing to invest in a property, make sure to carefully weigh how much money you stand to make from this investment each month against how much you expect to spend on maintenance each month. Doing this well in advance of purchasing a property will help ensure that you aren’t hit with any unpleasant surprises after the paperwork has been completed.
Working with Unlicensed Contractors
Nearly every rental property you consider purchasing is going to need repairs and/or renovations. Of course, there’s a large difference between mild to moderate repairs/renovations and a property being outright unlivable. Investing in the latter – especially as a first-timer – is generally ill-advised. While more seasoned investors may have enough experience with contractors and budgeting to make purchasing a fixer-upper feasible, first-time investors are practically asking for trouble.
Additionally, when working with contractors, make a point of limiting your options to individuals who are fully licensed. While you may be tempted to work with unlicensed contractors as a cost-cutting measure, doing so may ultimately cost you a lot more money than you stand to save. For one thing, an unlicensed contractor can sue you if they incur any injuries on the job, whereas licensed contractors will have workers’ compensation for themselves and any employees. Secondly, while licensed contractors stand to lose their licenses if they engage in unprofessional business practices, unlicensed contractors have very little incentive to complete jobs on time and on budget.
Additionally, when seeking out the right contractors, you should always do some online research. Testimonials and reviews from past clients can tell you a lot about someone’s general business practices and approach to customer service. After all, the absolute last thing you want is to be stuck with a bad contractor – even if they are licensed. Anyone in the market for multi-family renovation investment opportunities should also be in the market for highly-rated – and fully licensed – contractors.
Failing to Screen Rental Applicants
After closing the deal on your first rental property, it stands to reason that you’ll want to find tenants as expediently as possible. However, while the desire to start making money is perfectly understandable, you should never go with your guy when it comes to prospective renters. With this in mind, make sure that all applicants undergo a screening process that includes a credit check, income confirmation and contacting references. If a tenant is unable to keep up with rent, you stand to lose a fair amount of money, and depending on where the property is located, evicting renters for nonpayment can prove exceedingly difficult.
Rental property ownership can be a tremendous boon to your personal wealth. Good properties in good areas stand to generate a veritable fortune in passive income on a monthly basis. However, as is the case with any financial venture, property ownership often involves some growing pains. While learning through trial and error is quite common in the property game, certain mistakes can prove incredibly costly and limit the profitability of your investments. To help prevent your first foray into rental property ownership from becoming a masterclass in regret, remember to steer clear of the missteps discussed above.
